Mary@NAPTP

5 Excellent, Non-Pipeline Income Stocks

The IRA's share of the PTP's income reported on the K-1 is considered unrelated business income (UBI) and is taxed to the extent the net income exceeds $1000. The IRA, not you, owes the tax. The distributions are return of capital and are not taxed. There are some FAQs and primers addressing these questions on the NAPTP website, naptp.org.


On Sep 29 12:01 PM granger wrote:

> "As always, consult your own tax advisor to determine the appropriate
> tax treatment with respect to all these distributions."
>
> anyone have any good links as to how MLP's and the K-1 distributions
> get handled in an IRA
>
> I would like to do some research, again links not advice, is what
> I am seeking
>
> thanks

Looking at the Concept of MLPs for Dividend Growth Within Your Portfolio

Sorry about that -- I was trying to explain the concepts of partnership taxation, which can be complex, in understandable terms. I usually do pretty well at that, but clearly I failed in this instance. Partly, I think, because I was also trying to be concise, and jargon can be a shorthand. Also, the article itself created confusion. There is some good and more easy-to-understand material on the website.
It all can be boiled down to this: you do pay tax on your share of the partnership's (MLP's) net income, which you know based on the information it sends you (the K-1). You don't pay tax on the cash distributions until you sell your shares. Usually your cash distribution is a lot more than the income you pay tax on. You don't need to worry about how an MLP calculates its "distributable cash flow," as long as it's enough to support the distributions, which any research report will tell you. And contrary to what the articles said, MLPs aren't required by the tax laws to pay distributions. They do it because that's how they attract investors. I'd be happy to answer any questions and will do my utmost to use standard English.

On May 21 03:55 PM moneypenny wrote:

> nice use of financial terms to make it even more complex. and nice
> education too. keep it up! BTW - I did not understand what you said,
> and I do not intend to do PhD that I have to read your website.
>

Looking at the Concept of MLPs for Dividend Growth Within Your Portfolio

As the executive director of the MLPs' trade association , I have to agree with Mr. Young that this article shows a poor understanding of MLPs, and that the author should have educated himself before writing about them. Allow me to clear up some of the confusion.
1) First, the author has confused the MLP's taxable income with their cash distributiond. MLPs, like other partnerships, do not pay tax at the partnership level--but tax is paid on their income. All items that go into calculating taxable income--income, gains, losses, etc.--flow through the partnership and are allocated proportionately among the partners (i.e., the shareholders), each of whom nets them out and pays tax on his/her share of net partnership income at his/her own rate. This occurs on paper and has nothing to do with the cash distribution. Thus, it is not true that individuals pay no taxes because of the distributions, although the passthrough of losses and deductions does reduce taxable income quite a bit.
2) The distributions are something entirely different from the partner's share of taxable partnership income. As the article correctly states, they are considered a tax deferred return of capital, lowering the partner's basis in his partnership units and taxed upon sale of the units. Typically, the partner's share of taxable income in any year is far less than the tax deferred cash distributions.
3) Distributable cash flow is expressed in various ways, but is basically equal to earnings plus depreciation or depletion (because these are tax deductions only and do not affect the partnership's actual cash flow), minus "maintenance cap ex"--the cash needed to maintain the partnership's assets. MLPs do not necessarily pay out all their dcf--many have a "coverage ratio" (dcf/distributions) of more than 1.0, and like any well managed company will reserve the cash they need for business operations.
4) Finally, MLPs are NOT required to pay out their earnings in distributions to maintain their tax treatment. Their ability to maintain partnership tax treatment depends on earning certain tyes of income--90% of their income must come from (to summarize) natural resources activities, real estate rents or gain from selling real estate, interest, dividends, or commodities. As long as they meet this income requirement they can pay out zero cents in distributions (which some do) and their tax status will be fine.
I would urge anyone interested in learning more about MLPs to go to the website of the National Association of Publicly Traded Partnerships (naptp.org) to get some solid information.

Nervous About MLPs

Matt's comments get it right--and I would just like to add that Material Guy is also wrong when he says that MLPs have to pay out a large portion of their earnings to keep their favorable (i.e., partnership) tax treatment. MLPs' tax treatment depends on the kind of income they earn, not on how much of it they pay out (see section 7704 of the tax code if you want the full details). They pay out most of their cash flow because that's what gets people to invest in them and what they're set up to do, but they could stop paying distributions altogether (and some have in times of financial distress) and their tax treatment would remain the same.

What to Look for When Shopping for an MLP

Dr. Kris, as the head of the MLPs' trade association, the National Association of Publicly Traded Partnerships, I greatly appreciate your bringing MLPs to investors' attention. However, I'd like to correct an inaccuracy in your description of their passthrough taxation. The dividend--the accurate term for an MLP is "distribution"--is completely separate from the investor's share of partnership income. The investor is allocated, on paper only, a proportionate share of the partnership's income, gain, deductions, and losses. He nets them, and pays the tax on the resulting net income. The cash distribution is not a share of the income like a dividend is; rather it is a tax-deferred return of capital. It is not taxed when received, but lowers the investor's basis in his partnership units and thus increases the taxable gain when the units are sold. When analysts say that a distribution is "20% taxable," what they really mean is that the investor will be allocated net taxable income equal to 20% of his tax-deferred cash distribution. There is a lot of confusion around this, and I would appreciate your help in clarifying it. People can learn more by visiting our website, naptp.org.

Why Dividend Investors View Stocks Differently

Simpleman, KMP is an MLP, i.e., a partnership. The "dividend" is actually a partnership distribution and it is not currently taxed (it reduces your basis and adds to the tax when you sell the units). As a unitholder, i.e., limited partner in KMP, you are allocated on paper a share of KMP's tax items--income, deductions, etc.--and pay tax on the net. Because each distribution reduces the basis, it can theoretically go to zero, but this will take a long time to happen, because taxable income increases the basis. Best bet is to leave it to your kids; they'll get a basis stepup.